Digging profit in oil

You can start trading with just one product.

Since I prefer to trade on commodities, I would suggest you chose oil.

First, this is not financial advice. Trading activities have a?high risk of losing money rapidly due to leverage.?Around?80% of retail investor accounts lose money so?you should understand the basics of technical analysis and train on a demo account before getting started.

Secondly let me explain the different types of oil you can trade:

WTI?(West Texas Intermediate): is a benchmark for U.S. produced oil and is a lighter sweeter crude.

Brent: is an international benchmark based on crude oil extracted from the North Sea. Since this is a seaborne crude its production and transportation costs tend to be higher.

Crude: is a type of oil that comes mainly from Middle East and Russia and is not so light and sweet as WTI or Brent.

Not all trading platforms include these 3 types of oil, but you can search them on TRADINGVIEW, a?web based social network where a trader can analyze and trade directly in any broker using this platform’s advanced charting capabilities.?

Why do I suggest oil? For one, patterns are quite easy to recognize without any risk of apophenia (check my previous post to understand the concept). On the other hand, it is quite easy for you to keep up with news that can affect oil price.

I share below some basic knowledge that can better help you understand oil market:

Oil price is inelastic and unresponsive

Barrels are sold in global auctions and the highest bidder wins. The price will be dictated by a basic economical principle: the relation between supply and demand.

On the demand side, since 95% of the vehicles on the planet run on oil, consumption doesn’t react swiftly to price increases. However, lockdowns such as those that shut the economy globally in 2020 or the most recent in Shanghai, induce demand plunges that immediately drive oil prices down.

On the supply side, since oil production is such an expensive venture, producers are pumping at full capacity to maximize their revenue, so they don’t have the flexibility to rump up production without additional investments.

Oil prices were artificially managed between 1932 and 1972

During this period global supply was dominated by US producers and production was heavily regulated. Supply was controlled and around 1/3 of production was kept off market (spare capacity mechanism) just to keep prices stable. As demand started to increase, U.S. began to import oil from the Middle East (on the 1960’s) and at the same time Texas producers were forced to reduce their reserves.

OPEC controls 80% of oil reserves in the world

In 1973, OPEC (Organization of the Petroleum Exporting Countries – formed by Arabian countries) imposed an embargo on oil exports to U.S. and other allies as a retaliation for their support to Israel. This triggered the first oil shock with oil prices quadruplicating in a year.

OPEC could regulate oil prices since it exports more than half of all oil traded globally. To assure such control OPEC should adjust supply using the spare capacity mechanism. However, as China started to grow at a two-digit rate, especially after 2010, OPEC producers gave up spare capacity and lost that influence power.

OPEC+ emerged in 2016 with the addition of 10 other major oil producers, including Russia, the world largest exporter.

Currently, the only countries that still have spare capacity are Saudi Arabia and the U.A.E. (United Arab Emirates) but their stocks are not sufficient to counterbalance the loss that is coming from the supply interruption risk motivated by the war in Ukraine and the sanctions imposed to Russia.

The killer for oil prices is recession

The price of oil reverberates through economy, so it is closely linked to inflation. If oil goes up, and reaches record highs such as those in March 2022, transportation costs increase dramatically and some products that incorporate oil as a raw material will immediately become more expensive. With higher transportation and manufacturing costs, all prices will eventually go up and that will cause inflation. With inflation comes recession. Historically, all oil price heights were followed by economic collapses that provoked huge demand setbacks and, consequently, forced oil price to drop.

For now, the major trade on oil is up.

However, prices move up and down along the day... For instance, this morning oil prices were declining over 2% and in the afternoon the trend reversed. To win money as a trader on oil, I should have gone short in the morning (Short?selling occurs when an investor borrows a security, sells it on the open market, and expects to buy it back later for less Money – Invistopedia) and gone long after lunch (The term?long?position describes what an investor has purchased when they buy a security or derivative with the expectation that it will rise in value – Invistopedia). I could also be losing since a price reversal could have activated my stop loss limit.

Information is power so be informed, be prudent and trade smart.